All workstation set to use this proxy server, have 'Bypass proxy for local addresses' enabled, and have only one dns server setup in ip properties (10.0.84.9)

What I don't undersand is the following:
Let's say local dns server holds be.com local domain name and it has entry for ultra1which is:
ultra1 IN A 10.0.84.3 # running local intranet web server

When I ping ultra1 from Sqiod box I get the reply from 10.0.84.3
When I ping ultra1 from the dns server itself I get the reply from 10.0.84.3
When I ping ultra1 from the workstation I get the reply from 10.0.84.3
When I open the browser and type http://ultra1 I can get to the site.
Now I go to the IE browser and go to the proxy settings and unmark Bypass proxy for local addresses and I receive error message from proxy server that address cannot be found in local cache.(If I type http://ultra1.be.com I can access it)
Questions:
1. How come proxy server can resolve the address, dns server can resolve the address, workstation can resolve the address, but when I unmark Bypass proxy for local addresses it doesn't work?
2. When browser is configured to use proxy then dns name resolution request for the site isn't done on the workstation, but rather proxy machine tries to resolve the name for the workstation, right? If this is correct then why when I unmark Bypass proxy for local addresses on browser it doesn't work?